The telecoms company last week said it would cut 13,000 managerial and back-office jobs and leave its London headquarters as part of a business overhaul.
At the same time, the group left its dividend unchanged as it reported a 1% drop in revenue to £23.7bn and a 2% fall in adjusted underlying earnings (EBITDA) to £7.5bn in the year ended March 31, 2018.
For 2018/19 fiscal year, BT predicted a 2% decline in underlying revenue and for adjusted EBITDA to edge down to £7.3bn - £7.4bn.
Bernstein downgraded the stock to a ‘market-perform’ rating from ‘outperform’ and lowered its target price to 215p from 305p.
“Valuations are cheap but with no catalysts, flat free cash flow and no dividend growth, BT’s stock price is likely to stay at these low levels for a while,” it said.
BT will have 'inadequate dividend cash cover'
Bernstein also expects BT will have “inadequate dividend cash cover” between fiscal years 2020/21 and 2021/22 as it invests in the roll-out of fibre broadband and 5G networks.
The broker said the “accelerated path” to 5G will yield “mid-teens capital expenditure intensity for the foreseeable future”, versus its previous estimates of 11.5-12%.
“We are expecting these levels a full three years later, i.e starting 2021/22,” it said.
Bernstein also sees an “incremental cash drag” from BT’s restructuring plans.
BT has been trying to bring down costs amid concerns about its big spending on sports rights, customer service improvements, pension schemes and dividends.
“The attempt to reset the cost base by £1.5bn per annum by fiscal year 20/21 is belated,” Bernstein said.
“We expect cost inflation, margin compression and other step-ups to leave adjusted EBTIDA broadly flat after three years.
“And it comes at a staggering cash cost of £1.27bn for fiscal years 2018/19- 20/21 versus our previous estimates of £420mln.”
Regulatory pressures on BT
Bernstein said BT’s admission that regulatory pressures will see its excess returns normalise downwards is the “first and most material revision”.
Regulator Ofcom has toughed its stance on BT to provide access to the company’s Openreach network at a lower cost to rivals. BT is also under pressure to deliver on plans to upgrade the UK’s broadband infrastructure to improve internet speeds.
Bernstein revised its 2019 revenue outlook for Openreach down by 5% and its underlying earnings (EBITDA) forecasts by 9.5-11%.
BT pension contributions higher than expected
On BT’s new 13-year funding plan for its pension scheme, Bernstein said the outcome was “modestly poorer” than it expected.
Following a pensions triennial review, BT has agreed to pay £2.1bn into the scheme by 2020 and a further £2bn will be funded by the issuance of bonds.
BT’s pension had a deficit of £11.3bn at the end of June.
“£900mln in deficit recovery contributions per annum are £50mln higher than we had anticipated in a conservative scenario,” Bernstein said.
Bernstein predicts broadly flat adjusted EBITDA in 2018/19, a 12.5% downgrade to its previous forecasts.